Question

The Caribbean Industrial Producers manufactures two products, “Zinc” and” “Ply”. The following sales forecast for 2016 was decided on by the budget committee and presented to you the management accountant.

                                                     Sales forecast

Details	Zinc/units	Ply /units
December 2015	6,000	3,700
January 2016	5,500	4,000
February 2016	6,200	4,500
March 2016	5,000	5,200
April 2016	4,900	5,400
May 2016	6,400	4,800

Notes:

(i) During 2016 the company sold one unit of Zinc for $1,200 while one unit of Ply was sold for $$1,500.

(ii) To make one unit of Zinc four units of raw material BZN980 are used, while two units of raw material CZN980 are used to produce one unit of Ply.                                          .

(iii) Raw materials stock in units at the end of each month is to be held at a level equal to twenty percent (20%) of the forecasted sales for the next month.

(iv) It was decided by management that at the end of each month there should be enough finished goods stock on hand to meet fifteen (15%) of the sales for the next month.

(v) During 2016, direct raw material charge per unit was budgeted at ten percent (10%) of the unit selling price of the finished products.

Required:

For the period, January 2016 to April 2016 do the following:

1. The company’s sale budget.                                                                                 
2. The production budget for both products.                                                          
3. The direct raw materials usage budget for both products.                                   
4. The direct raw materials purchases budget.                                                        
5. Outline four advantages that can be derived from proper budgeting practices within an organization.                                                                                                                    
6. Briefly explain, using two examples what is meant by a “limiting budget factor”

Answer 1

a. Company’s sales budget

Particulars	Jan-16	Feb-16	Mar-16	Apr-16	May-16
Zinc	Ply	Zinc	Ply	Zinc	Ply	Zinc	Ply	Zinc	Ply
Sales (Units)	5500	4000	6200	4500	5000	5200	4900	5400	6400	4800
Selling price	1200	1500	1200	1500	1200	1500	1200	1500	1200	1500
Sales value	66,00,000	60,00,000	74,40,000	67,50,000	60,00,000	78,00,000	58,80,000	81,00,000	76,80,000	72,00,000

b. Production budget:

Particulars	Dec-15	Jan-16	Feb-16	Mar-16	Apr-16	May-16
Zinc	Ply	Zinc	Ply	Zinc	Ply	Zinc	Ply	Zinc	Ply	Zinc	Ply
Demand Sales (Units)	6000	3700	5500	4000	6200	4500	5000	5200	4900	5400	6400	4800
Closing Inventory (15% of next month sales)			930	675	750	780	735	810	960	720
Opening inventory			825	600	930	675	750	780	735	810
Production (units) Sales + Clog inv - Opg inv			5605	4075	6020	4605	4985	5230	5125	5310

c & d. Direct raw materials usage budget and purchases budget

	Dec-15	Jan-16	Feb-16	Mar-16	Apr-16	May-16
	Zinc	Ply	Zinc	Ply	Zinc	Ply	Zinc	Ply	Zinc	Ply	Zinc	Ply
Demand Sales (Units)	6000	3700	5500	4000	6200	4500	5000	5200	4900	5400	6400	4800
Production			5605	4075	6020	4605	4985	5230	5125	5310
Raw material BZN980
-Required for production			22420		24080		19940		20500
-Closing inventory (20% of forecasted sales req)	4400		4960		4000		3920		5120
-Opening inventory			4400		4960		4000		3920
Raw material BZN980 requirement Budget (units) –Usage budget			22980		23120		19860		21700
Raw material BZN980 requirement Budget (value @10% of 1200 = @120 per unit) –Purchases budget			2757600		2774400		2383200		2604000
Raw material CZN980
-Required for production				8150		9210		10460		10620
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